International oil majors have in recent times indicated Nigeria government’s race to reform the deep-water tax regime and the implications of the new Finance Act for the sector risk impairing future production.
This shows in the recent investment decisions some of the big international oil companies have made recently. Total wants to sell its 12.5 percent stake in the Bonga deep-water project. The viability of the Shell-operated $9.7 billion Bonga Southwest/Aparo project was directly linked to Nigeria not deteriorating commercial terms for drillers. The Total-operated Preowei project seems to have its final investment decision (FID) delayed into 2021, despite being a tie-in to the Egina floating production storage and offloading (FPSO) vessel. Exxon’s $8.2 billion Owowo West was postponed indefinitely.
This might not be reflected in any sharp reductions in crude production or export volumes in the short term. Besides, the 10-12 percent per year decline in hostage-taking and infrastructure-targeted attacks that have been taking place since 2017 has contributed to an uptick in crude exports (massively boosted by the Egina startup in early 2019), with 2019 average levels being on the verge of rising above the 2 million barrels per day (mbpd) threshold, at 1.99mbpd.
Two years ago, Nigeria Extractive Industries Transparency Initiative (NEITI), an agency enabled by law to promote accountability in the management of oil and gas revenue stated in one of its reports that the old agreement used in computing revenues to be shared between the government and oil companies was no longer acceptable and called for an urgent review. Oil revenues between 2015 and 2017 were estimated at $104.484 billion.
NEITI affirmed that the loopholes in the 1993 Deep Offshore and Inland Basin Production Sharing Agreement (PSC) Act. This determined revenue sharing formula between Nigeria and oil companies. The country’s revenue from the PSC was $35.893 billion against the oil majors who earned about $68.591 billion. This generated a fury, setting the country on a quest to plug the loopholes and recover apparently lost revenues.
The Act provided two conditions under which it can be amended. When oil prices exceed $20 per barrel or 15 years after the initial contracts were signed. Crude oil prices averaged $16.33 in 1993 and had risen to $17.44 by 1999 which was the last time efforts were made to amend the decree.
This forms the backdrop under which the Nigerian government is going after international oil majors operating in the deep-waters of the country. Last year, Nigeria ordered several major foreign oil and gas companies to pay nearly $20 billion in taxes it says are owed to local states, industry and government sources told Reuters.
Armed with the new Finance Act, the government now has legal backing to enforce new taxes across the value chain in the oil and gas sector which may further discourage investments.
The new has repealed section 60 of the Petroleum Profit Tax Act (PPTA) and Section 43 of Company Income Tax Act (CITA), this means the dividend distributed from profits already charged to Petroleum Profits Tax would be subject to withholding (WHT) up to 10 percent. This could be quite adverse for the upstream oil and gas exploration and production sector which is chargeable to the highest tax rate (up to 85% in some instances).
